Japanese Treasury Holdings

In the past we recommended that Japan consider using its massive reserve holdings to support the domestic economy. In particular we suggested selling 1/4 of their reserves and to finance domestic consumption. In early 2008, in response to our op-ed piece in the Financial Times, the IMF quickly argued that it did not think that Japan needed fiscal stimulus and Japanese officials tried to explain that the reserves were purchased by issuing financing bills and that would leave an unfunded liability (the financing bills would remain).

Speed forward to today and rumors are making the rounds suggesting that Japan is set to tell the US that it plans on selling $100 bln of Treasuries to finance domestic programs. The fact that the dollar is rallying against the yen and is back above JPY88 seems to suggest that many do not believe this talk.

The latest US Treasury data available, for the month of September, indicates that Japanese investors--public and private--have bought $125 bln of Treasury bonds in the first 9 months of the year. All last year, Japan bought about $45 bln of Treasury bonds.

While we too suspect the rumors are likely unfounded, the Japanese fiscal situation is in poor shape and the government wants to curb new JGB issuance.